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The Sri Lankan economy is facing severe external shocks and challenges such as US tariffs, trade uncertainties, and the prospect of a global recession. The escalation of the war in West Asia is another potential threat. These external shocks could undermine the country’s trade-, tourism- and remittance-dependent economy.

Trade dependence

Sri Lanka has been, is, and will be a trade-dependent economy. This is an inherent characteristic of a small country that has limited resources and is export and import dependent.

Small island economies such as Mauritius, Jamaica and Caribbean nations are vulnerable to external shocks. Increases in prices of essential imports and decreases in prices of their exports destabilise such economies. Furthermore, Sri Lanka is heavily dependent on remittances from its workers abroad and earnings from tourism that could be affected by wars.

Export-import dependence

The instability of the country’s export-import economy has been the theme of many an economic thesis. In contrast to earlier decades, the instability has perhaps increased in the current trading uncertainties and wars. Furthermore, the country’s manner of coping with the external shocks is somewhat different.

Severe shocks

There is no reason to expect a lessening of the external shocks in the foreseeable future. In fact, the current tariff wars are showing signs of escalating. The Sri Lankan economy could face severe external shocks if the tariff wars escalate and the efforts fail to bring about a lasting peace between Russia and Ukraine and solve the Palestinian problem with a two-state solution.

These two wars could undermine the stabilisation and growth of our external trade, remittance and tourist-dependent economy.

Terms of trade

Fluctuations in prices of exports and imports were the main reason for the adverse terms of trade in the past. Prices of primary commodities like tea and rubber tended to fluctuate and often reach low levels. The current external shocks are different. President Trump’s imposition of high tariffs on imports to the US for mostly non-economic reasons has affected large countries like China, Brazil and India, as the US was the largest market for their exports. This was also so for small countries like Sri Lanka that depended heavily on the US market for manufactured exports.

Wars

In addition to tariffs, the current wars in West Asia and the Russian-Ukrainian war could escalate and disrupt shipping and air transport. If these were to happen, prices of the country’s essential imports of petroleum, fertiliser and food could increase while our exports could suffer. More significant would be the possibility of remittances and earnings from tourism reducing foreign earnings drastically.

Negotiations

The negotiations to end the two wars are, therefore, vital for our external finances and economic growth. In spite of last week’s cordial meeting in Washington DC between President Trump, President Zelensky and European leaders, there is still no certainty of a settlement.

External shocks

These are, however, beyond our control. What then are the ways in which we can reduce the impacts of these external shocks?

Strategies

Increasing agricultural production, diversifying export products and markets, and adding value to our export products are ways by which the country’s vulnerability to external shocks could be mitigated.

Agriculture

Increasing agricultural production is essential to reduce food imports and enhance agricultural exports. Increased production of food crops not only reduces food import needs; it enhances rural incomes and reduces poverty. Agricultural output has to be increased mainly by increasing the productivity of crops, as land availability is scarce.

Self-sufficiency in rice

One of the post-independence achievements of the country was the transformation of the food-dependent economy of the 1950s to one of near self-sufficiency in the 2020s. Then President Gotabaya Rajapakse’s fertiliser fiasco reduced paddy production drastically. Import dependent In the 1950s, the country imported about 50 per cent of its rice needs, as well as other food, for a population of about 7 million. A decade or two ago the country was nearly self-sufficient.

Agricultural production

Increased production of rice and other crops would reduce both import expenditure and the vulnerability to higher import prices and external shocks.

Increased food production would reduce the need for imported food such as rice and wheat. Increasing agricultural production is vitally important to improve the trade balance. Increased production of food crops to reduce dependence on food imports, as well as increasing production of export crops—tea, rubber, coconut, cinnamon, pepper, cashew, and cardamom are critically important. This should be complemented with the value addition of these products. The country’s pepper and cinnamon are the world’s best, and they should be branded as quality products.

Problematic

Admittedly the cultivation of these crops faces severe problems such as the shortage of labour and damage to crops from wild animals. Finding solutions to these problems is vital to increase production.

Export diversification

We have achieved some diversification of export markets this year, according to the Export Development Board (EDB). The diversification of export markets goes hand in hand with the diversification of export products.

Summary and Conclusion

Sri Lanka’s economy has been, is and will be vulnerable to external shocks. The current challenges to our external trade must be used as an opportunity to diversify our trade and reduce the severity of the likely shocks. In spite of favourable economic developments this year, the Sri Lankan economy is vulnerable to external shocks. Therefore, it is imperative to accelerate the diversification of export markets and export commodities by undertaking the needed reforms.

Increasing agricultural production is vitally important to improve the trade balance. Increased production of food crops to reduce dependence on food imports, as well as increasing production of export crops—tea, rubber, coconut, cinnamon, pepper, cashew, cardamom and other crops are critically important. This should be complemented with the value addition of these products and effective marketing. Admittedly, the cultivation of these crops faces problems such as the shortage of labour and damage to crops from animals. Finding solutions to these problems is vital to increase production.

On the other hand, the government must assist export industries by reducing the costs of production through the removal of para tariffs on raw material imports, reducing electricity tariffs and increasing cheaper domestic production of raw materials.

Final word

The onus of increasing exports is with the private sector, but the government must facilitate them by removing constraints and finding export markets through our foreign missions abroad.